Good day. Welcome to the Mowi Management Q3 Earnings Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kim Døsvig. Please go ahead.
Thank you, good afternoon to everyone. My name is Kim Døsvig. I'm the IRO and Head of Treasury in Marine Harvest. Today, we'll go through the third quarter earnings numbers we just released this morning, then we'll have a Q&A session towards the end of the call. Starting on page three, highlights. Q3 was a very good quarter for Marine Harvest. We reported a record-high operational EBIT of EUR 194 million in the quarter on the back of high salmon prices in all markets due to strong demand. The costing decrease was pleasing to see in Norway, Chile, and Canada. The performance improvements continued in the Consumer Products. The board announced a quarterly dividend of NOK 3.4 per share in the quarter. Page four, key financials. Operational revenue increased by 2% year-over-year. Operational EBIT increased 8%.
However, harvest volumes declined by 2%, down to 95,000 tons. Net interest-bearing debt of NOK 664 is below our net debt long-term target of NOK 1.05 billion. The underlying EPS in the quarter of NOK 0.29 was above the net cash flow per share of only NOK 0.12. This is due to a seasonal buildup of biomass in sea. It's related to more biomass, in particular in our Norwegian operations, because in Q3, we tend to build volumes in sea.
Return on capital employed was good at 28.8%, adjusted equity ratio of 54.3%. Our balance sheet is very strong. Operational EBIT for the group of about EUR 2 per kilo. Page five on the salmon prices. We see that compared to the past year, salmon prices in the quarter was at high levels. They declined by about 6% year-over-year in Norway in the quarter, still at high levels.
The same goes in the Canadian market and also for the Chilean market. Page six, price achievement. Price achievement was above 100% at 107 in Norway, this is supported by improved contract contributions. We have harvesting volumes on contracts, the price level on those contracts were slightly above the spot price in the quarter. In addition, the profit contributions from the other sales and Consumer Products in business areas is also allocated to the contracts. The price achievement was good in Norway.
The same in Scotland, was significantly improved by good contract prices. In Canada, we sell everything in the spot market, hence price achievement is close to 100%. In Chile, we have some contracts, hence the price achievement was 109. Page seven, operational EBIT comparison. As you see, there's not any major changes year-over-year. Slightly reduced feed earnings in the quarter.
Farming contributions was better on the back of higher prices. Slightly reduced volumes, as I mentioned, cost is fairly stable year-over-year. Markets is more or less the same, the Consumer Products business area contributed with better operational performance across many of our factories in Europe, hence their result was better. Going into the various business areas, just to give you some of the highlights in the quarter by business area, starting on page eight with Norway. An operational EBIT of NOK 124 million in the quarter.
Good earnings supported by the higher prices and, in particular, contract prices. Slightly reduced volumes compared to guidance due to continued sea lice and biological issues in general. We see that the '16 generation has been a troublesome generation for Marine Harvest, with reduced harvesting volumes and also elevated cost level.
We do see that on the '17 generation, which we have stocked in the spring and in the fall, we will start to harvest on that generation in Q2 next year, and that generation looks much better compared to the '16 generation, both in terms of relative growth, so the size of the fish is bigger, and also the mortality is lower than the '16 generation.
Page nine, our contract portfolio. We contracted about 21,000 tonnes in the quarter. In Q4 is typically the quarter where we contract the most salmon, and 2017 is no exception. We expect the contract volumes to go above 25,000 tonnes, and then slightly reduced in Q1. At more or less the same prices as achieved in Q3. We'll skip page 10 and go into the Scottish business area. The Scottish operations delivered improved results year-over-year.
Operational EBIT increased from NOK 6 million to NOK 25 million. Volumes were up, and biological costs were down year-over-year. Bear in mind that the Q3 '16 was a poor quarter for Scotland. Quite easy year-over-year comparison figures. In the fourth quarter, we expect costs to increase slightly as we are harvesting from some poorer sites compared to Q3 '17. Canada on page 12. The Canadian operation delivered NOK 19 million in operational EBIT. As you see on the waterfall chart, the price deviation is negative.
Some of the cost elements have also been negative year-over-year. Hence, cost is up. Still, the business area delivered a good set of results, decent profits as we write. The Canadian operation also had a troublesome Q3 in relation to weather. They had a very warm weather with connected biological challenges, plankton issues, as an example, and also sea lice challenges.
Despite that, Canada continues to be a good area to farm salmon. Moving on to page 13, Chile. Year-over-year, Chile had a good development, apart from a negative price development. You see, all the bars are contributing to improved results. The better cost performance year-over-year is evidenced by the full cost in box of $4.5, which is significantly down year-over-year. However, costs are expected to increase somewhat going into the fourth quarter.
Then Ireland and Faroes on page 14. Ireland again had a very good quarter, similar to Q2. An operational EBIT per kilo of NOK 3.23, which is very good. Ireland produces and sells organic salmon, which achieves a significant price premium compared to traditional Atlantic salmon. Organic salmon is a niche product, but a very profitable operation for us. In the fourth quarter, however, we expect the cost to increase.
In the Faroes, we finally started harvesting in September, hence volumes are quite low, but profits are very good for Faroe salmon. Going into Consumer Products on page 15. Operational revenues increased year-over-year due to higher prices. You see that volume sold is down from 32,000 tonnes to 28,500 tonnes.
The operational improvement process across many of our factories in Europe is good. Both Morpol in Poland, Rosyth in Scotland, and Pieters, as an example, in Belgium, they delivered good results or decent results. An operational EBIT margin of 2.8%. We see that the value of salmon sold continues to rise across all key markets. Despite the volume reduction, the price effect more than offsets the volume change year-over-year. Page 16 on feed. The Norwegian operation delivered a good set of results.
Q3 is high season for feed production and feed sales. It's in line with our expectations. We have seen that the raw material prices for the various feed ingredients have declined recently. Lower raw material costs. However, the feed price has also been reduced, which the farming operation is benefiting from. Feed is still able to deliver above 7% EBIT margin, which is good. In Scotland, the feed construction process is on schedule. We are on track to finish the feed plant in the second half of 2018. Hence, our farming operations will start to source feed internally from the second half 2018 onwards, which is very interesting. Moving on to the financial and market section. I've been through the key numbers on the P&L and balance sheet. I will skip those.
No changes in the cash flow guidance for the year on 21. No changes to the financial overview on page 22. I'll go into the supply developments on page 23. Relative to our guiding last quarter, supply ended up very close to what we forecast. All the main markets, Norway, Chile, Scotland and Canada, were in line with guidance.
The global market supply increase was as expected of about 9% year-over-year. Prices on page 24, we have talked about. Moving on to page 25, global volume by market. We see that most of the arrows, apart from Japan is green, is positive. The market consumption increases year-over-year, which naturally follows the increased harvesting as well year-over-year. If we convert the volume figures to value figures, we see that the markets are consuming more salmon as well above the actual consumption growth figures.
In the European Union, as an example, we see that the market is up approximately by 5% in value terms year-over-year. The key markets continue to grow. In the U.S., the U.S. increased by 11% year-over-year as they have access to more Chilean salmon, and also the imports of large-sized European Atlantic salmon continues. The 18% growth in Asia is impressive. They continue to source salmon from all key markets. The industry supply growth outlook on page 26. No major changes to our 2017 guidance of 4%-6% for the global market. 2018, we expect growth to be higher as the biomass in sea is currently higher. The range is ±7% for the global market. We've also referenced Kontali's 2019 expectations of 3%. Quite modest growth if you go beyond 2018. Marine Harvest volume guidance on page 27.
We reduced the guidance for this year by 8,000 tonnes in the quarter, and this is mainly caused by Norway. The reduced volumes in Norway of 7,000 tonnes is driven with the biological challenges in relation to the 16-G that I mentioned. Volume guidance for 2018 of 410 means that we expect to see a partial recovery of volumes in Norway. We hope and expect to increase our volumes significantly in that part of our farming footprint. Scotland will be slightly reduced due to a change in the stocking pattern. Canada will continue to increase. Chile should also continue to increase post the algal bloom in 2016. Ireland and Faroes, and the other units are more or less stable. Just to sum it up on page 28, the outlook slide. We have a strong financial position.
We have a low net debt and a high equity ratio, so good financial position. We have a focus on organic growth across our business, both in feed with a new feed plant in Scotland, across our farming operations, and also in Consumer Products. We're expanding some of our factories in Europe and also opening up new factories or bigger factories in the U.S. and also in Asia. We see a strong demand and modest supply growth going forward. As I mentioned, the quarterly dividend of NOK 3.4 was announced this morning. That concludes the highlights of the presentation. Operator, please open up for any questions that there might be.
Thank you. Today's question-and-answer session will be conducted electronically. If you'd like to ask a question at this time, please press star one on your touchtone telephone. If you're using a speakerphone, please turn your speaker function off to let your signal to reach our equipment. Once again, that's star one if you have a question. It appears our first question comes from Gianmarco Bonacina with EQUITA.
Yes, sir. Good afternoon, Kim. A couple of questions. The first one is about the preliminary indication you put in the presentation for 2019 global supply growth from Kontali, about 3%. I am a little bit surprised to see this low number, considering that we should expect the new capacity from the development licenses.
Can you give maybe an update based on the latest information, what could be reasonable to expect from these new licenses in 2019, if any, let's say, new capacity from these? The other one on the working capital. I heard this morning that the management said we should expect an increase in the debt because you are building clearly biomass for next year. Actually, this year, 2017, the supply is going down, and the working capital is quite high, I guess, because you are already building the biomass.
For next year, a rough indication for working capital could be, let's say, ballpark the level of this year? Should be lower, should be higher? Thank you.
Hello, Gianmarco. Thanks for the questions. I think if you look on the biomass figures today, the biomass in Norway is about 8% higher year-over-year. That explains the 2018 growth forecast of 5%-9%. If you go beyond 2018 into 2019, we don't know exactly how many fish has been put into the sea for 2019 harvest yet. You mentioned the R&D licenses. I guess the development licenses shouldn't contribute in any significant way to growth for Norway in 2019, as very few projects have been accepted or granted at this point in time. The traffic light signal system was implemented, in fact, yesterday. I think consensus is for about half of the 6% capacity adjustment, so about 3% growth over the next two years. This will be an increase already today.
The MAB is lifted today, hence much of that 3% should already be harvested in 2018. Of course, some of it may be into 2019. I think that's the reason why the global supply estimate is only 3% in 2019.
I think also if you look outside of Norway, of course, Scotland and Canada are growing slightly. Also in Chile, I think that with the new stricter regulations with lower stockings we have seen recently, the new regulations are starting to take effect, hence slightly reduced growth from Chile ahead of us. To your question about working capital. Of course, working capital is difficult to forecast because it depends how much biomass we're able to grow. We have kept our guidance unchanged, hence we expect to grow working capital both in sea, but I guess more so in fact from the Consumer Products division in Q4. Q4, we sell a lot of salmon through our Consumer Products division, but we typically get paid in Q1, hence we have working capital build up in Q4.
2018 guidance on working capital. That's too early to give at this point. We'll give cash flow guidance next quarter for the year. I think we'll just revert to that next quarter.
Okay. Just a very quick follow-up. Right now, it would be fair to say that the biomass in Norway, global for the market, stands roughly 10% below the MAB.
Well, I think if you go back a few months, that would've been the case. I know that the growth has been good, feed sales have been good, and the biomass has increased month-over-month for several months now.
Okay. It's less than that.
That gap has been closed somewhat.
Okay. Thank you.
You're welcome. Any more questions, operator?
Our next question comes from James Law with HSBC Global Asset Management.
Hi, Kim. Thanks for taking my questions. I have two questions. First of all, on the supply side, just from your comments a few moments ago, it seems like regulations currently is the main barrier towards supply growing faster rather than biological issues. Can I just confirm if that's true or if you could elaborate on that? The second question I have is, I was wondering if you have any sense whether, because of problems in Chile in 2016 and the high prices last year, whether your current share or Marine Harvest share of the global profit pool for salmon, do you think that's probably a bit higher than it should be? Thank you.
Sure. Thanks for the questions, James. On the supply side, I think you're absolutely right. It's constrained by regulations. Regulations is driven by biology; the two are definitely interlinked. Today in Norway, growth is linked to sea lice as the indicator used to control growth. If sea lice, i.e., if biology improved, the regulator would allow for more growth. You're right, both in Norway and Chile, but also in Scotland and Canada, it's a very regulated market, regulations are key to follow in our industry. In Chile, I think the prices we saw towards the end of last year and into 2017 were very high because of both of the algal bloom in Chile and the lost volumes, but also the production issues the industry had in Norway.
Less volumes were available in the market, and 2016, in fact, experienced a negative supply growth year-over-year, which we haven't seen for many years. I think as the markets are normalizing in the sense that they are harvesting and producing more salmon, of course, it has an effect on price.
Thanks. Could I just ask a quick follow-up?
Sure.
Everything you said makes sense, just developing on that. In terms of how much supply growth the market can absorb, what's your view of how quickly the supply can grow each year without having a very negative impact on price?
Yeah. Demand growth has typically been around 6%-7%, sometimes 8% per year in our sector. As there's very little inventory of salmon, it's a fresh market. What is harvested is consumed. If supply has been below those numbers, prices have typically increased.
Great. Thank you.
You're welcome.
Just as a reminder, please press star one if you have a question at this time. Our next question comes from Carl Johannessen with Pareto.
Hi, again. Just a very short, specific question. Is there a reason why such a big portion of the EBIT per kilo in Faroe is entitled to Marine Harvest Markets?
Hello, Carl. That's a good question. No, this is related to the way that they allocate profits within the various sales and farming. I think it's above where it should be, but I think it's a reflection of the low volumes we have harvested in the quarter, of only 1,000 tons. I wouldn't read too much into the split between farming and markets. An EBIT of NOK 2.25 is still a good number for the Faroe operation.
Okay, thanks.
It appears we have no other questions in the queue at this time.
I would like to thank everyone, and this concludes the Q3 earnings conference call. Thank you for listening, and goodbye.
That does conclude today's conference. Thank you for your participation.